Credit Card Crunch Will Burn Us All

Consumers left with little reason not to default on unsecured debt

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We won't need credit cards anyhow, once we've returned to the barter system.

We're seeing more advice from experts about how to save up those massive piles of cash we'll need to live on once we're all unemployed. Whereas in a normal situation you'd be advised to pay off your credit cards because credit cards are odious instruments designed to keep consumers in perpetual bondage at high interest rates, more experts now suggest that you actually forget about paying off your cards and just make the minimum payment while you stockpile cash.

Because credit cards are unsecured debt, it's not as if your credit card lenders can actually repossess any of your belongings if you stop making payments -- which you'll probably have to do if you go unemployed for long enough.

Blame Them For Your Empty Wallet

As creditors remain resolutely obnoxious in the face of consumers' rapidly worsening financial situations, they give people fewer and fewer reasons to actually honor their obligations. Millions of faithful credit card users who have never missed a payment or exceeded their credit limit have been astonished over the past several months to find notices in the mail informing them that their creditor is raising their interest rates to unheard-of levels.

Why? Not because of anything the consumer did. No, the creditor is just in a bit of a pinch, due to all the bad bets they made on people they never should have lent to, and now the cost of those bad bets has been passed on to the responsible consumer.

Congress passed a law to prevent precisely this kind of arbitrary rate-hike, but it won't go into effect until mid-2010. And now some people are warning that if the law takes effect at all, it could cause a further freeze in the credit markets as lenders refuse to extend credit to anyone if they can't "adjust for risk" in the future.

It seems more likely that lenders will simply have to make more considered decisions to begin with, and lend to people who are capable of actually repaying. Of course, those very people may not want to borrow from the lenders who treated them so shabbily just a few years before.

And this, in a nutshell, is why the American credit industry is doomed -- and deservedly so.